They are listed on the New York Stock Exchange, if that makes it any easier.

On a less snarky note: the split between "stocks" and "bonds" is a misnomer. What people usually really mean is "high-volatility but hopefully higher-growth to give me gains" and "low volatility to keep me sleeping at night because I'm not worried it might go to $0 tomorrow".

This chart shows volatility. The blue line at the bottom is Total Bond. The black line is Total Stocks. The yellow line is REITs. The green line is "low volatility stocks".

It is clear that none of them, not REITs and not low-volatility stocks, are anywhere close to bonds.

I agree. REITs count as Stocks, albeit Stocks with some bond-like qualities, such as Interest Rate risk.

When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth and tell the whole world - 'No, YOU move'--Captain America, Boglehead

1. Definitely stocks.
2. The total stock market index already holds REITs so many Bogleheads would not recommend adding a REIT fund.
3. Many experts including Swensen, Ferri and Swedroe (at least before) recommend holding them.
4. I have about 5% which may not really be meaningful. 10% would probably have an impact.
5. See Larry Swedroe's recent analysis:http://www.etf.com/sections/index-inves ... nopaging=1

Also does REITs specifically VNQ and VNQI count towards what asset-class ? i.e. LC/MC/SC ? and also towards what style i.e. growth/value/blend?

thx

Depends on the REIT fund, among other things. Why does it matter to you, and does this add any understanding as to the behavior or role?

As an aside, Vanguard Global ex-U.S. Real Estate ETF (VNQI) is not even a REIT fund. Stipulations on REIT structures vary across the world but it doesn't remotely limit the holdings to REITs, having sizable stakes in non-REIT real estate developers and operators and some other categories too.

Both funds hold companies across the large/small and value/growth parts of the market. If you're interested in some kind of average categorization (which loses information about the underlying composition), you need to define exactly what would make you consider something LC/MC/SC, grwoth/value/blend. If you're fine with their methodology, you could use Morningstar's style box analysis to see where the dot is. Looks like mid blend for VNQ and large blend for VNQI, even though the average market cap in VNQ is higher. They define the breakpoints differently in ex-US, so that's how it turns out.

Vanguard Fan 1367 wrote:There is someone in the universe of investing who says that given the low interest rates on bonds that you might consider REITS as sort of a proxy for bonds. I believe it is Burt Malkiel.

the argument about Commercial Real Estate is that it is inherently less volatile than stocks, because it represents a higher claim on the cash flows of a company than the ordinary equity. Companies have to keep paying leases to stay in business, generally.

Which is true. However CRE investors then make high utilization of leverage, borrowing against those stable cash flows. That raises volatility.

Treating REITs as bond proxies is a dangerous route to go down mentally, because their price volatility will be much higher. Also, dividends can be cut, and were in 2009.

I don't think of REITs as the same as either ordinary stocks or bonds.

I have a top-level target percentage for REITs as a result.

If you want to keep only two categories in your top level for some reason, then I would suggest re-labeling "stocks" as something like "equities" or perhaps "riskier assets." Then you could include REITs in that, since they are in fact equities and are in fact riskier.

Although the question has been answered, one could have looked up whether REIT companies are represented in a Total Stock Market or a Total Bond Market fund. The same kind of "looking" would work for market cap.

The morningstar.com web site has the conventional data to look for answers, too. And while a style box may not be a way to characterize a REIT, the M* style grid for the Vanguard REIT index fund doesn''t look like what many people expect it to.

lack_ey wrote:
Depends on the REIT fund, among other things. Why does it matter to you, and does this add any understanding as to the behavior or role?

As an aside, Vanguard Global ex-U.S. Real Estate ETF (VNQI) is not even a REIT fund. Stipulations on REIT structures vary across the world but it doesn't remotely limit the holdings to REITs, having sizable stakes in non-REIT real estate developers and operators and some other categories too.

Both funds hold companies across the large/small and value/growth parts of the market. If you're interested in some kind of average categorization (which loses information about the underlying composition), you need to define exactly what would make you consider something LC/MC/SC, grwoth/value/blend. If you're fine with their methodology, you could use Morningstar's style box analysis to see where the dot is. Looks like mid blend for VNQ and large blend for VNQI, even though the average market cap in VNQ is higher. They define the breakpoints differently in ex-US, so that's how it turns out.

Thanks.

My desired REIT (US+Ex-US) AA was 10%. I was NOT considering REITs in my US/ES-US AA.

I had goal to reach BONDS to 20% by end of this year. But due to some mishaps, looks like I will not be able to.

So was considering accounting REITs as part of my stock AA, and maybe make a call at the end of year to just exchange/rebaalnce my explicit REIT holdings in to my BONDs bucket.

(I was looking at marketwatch !, will look in morningstar, but was behind pay proxy)

I agree with what others have said...think of them as stocks not bonds. That being said I remember hearing Meb Faber recently refer to real estate not as it's own asset class (he named what he thought were the only asset classes--stocks/bonds/commodities/cash and he said one other...managed futures or alternatives maybe?) but rather as having the attributes of a bond and a commodity. I think he looked at it as a bond because of the regular income stream and the commodity because it's price is subject to supply and demand (of course that can be true of stocks too I suppose). Don't know if that helps or if that's where you might have gotten the impression that some look at real estate as a bond.

"Invest we must." -- Jack Bogle |
“The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

If I had to pick one, REITs behave more like equity than bonds, but I really don't care. I've chosen to look at REITs as something different in my AA, so I don't think of them as equity or bonds, I think of them as REITs.

2) And, they behave like stocks. (Morningstar's charts aren't displaying at this moment so I'm using Fidelity's...)

Compare the blue line to the red and the yellow lines. In your personal opinion, using any criteria you like, which would you say?

a) The blue fund behaved more like the yellow fund than the red fund.

b) The blue fund behaved more like the red fund than the yellow fund.

Well, yellow is a bond fund, red is a total stock market fund, and blue is a REIT fund. If you answered (a), then you are saying REITs behaved more like bonds. If you answered (b), then you are saying REITs behaved more like stocks.

There's some weak justification for saying that REITs behave differently from other stocks and can provide some diversification benefit to a stock portfolio. There is no justification at all for saying that REITs are like bonds.

Some advisors push sales of individual non-traded REITs to investors, possibly because they get high commissions on those sales. Because they are non-traded, investors see a stable "market value" number on their statements, and because they pay a regular income stream, they are said to be pitched as if they were sorta-kinda like bonds.

arcticpineapplecorp. wrote:I agree with what others have said...think of them as stocks not bonds. That being said I remember hearing Meb Faber recently refer to real estate not as it's own asset class (he named what he thought were the only asset classes--stocks/bonds/commodities/cash and he said one other...managed futures or alternatives maybe?) but rather as having the attributes of a bond and a commodity. I think he looked at it as a bond because of the regular income stream and the commodity because it's price is subject to supply and demand (of course that can be true of stocks too I suppose). Don't know if that helps or if that's where you might have gotten the impression that some look at real estate as a bond.

Because a REIT is a listed vehicle, and because REITs make use of debt leverage against the buildings they own, a REIT is more like a stock than the underlying asset class of commercial property would suggest.

It's true that Commercial RE is attractive for: 1). regular income stream 2). correlation with inflation 3). tenants tend to pay their rent ahead of other creditors except in bankruptcy scenarios BUT investing in REITs is investing in stocks/ equity.

Nate79 wrote:What I don't understand is why people could even think that REITs could in any way at all be consider part of a bond allocation or bond like.

This may be because some of the leading personal finance authors make that confusion. Or imply it. Thinking Burton Malkiel in particular, or David Swensen (I'd have to reread Swensen to see exactly what he says). Both in the late 90s/ early 2000s suggested 20% weightings in REITs as a source of income ie bond-like (even if they don't use so many words).

So I think it has gotten blurred in the minds of many investors. To be fair, since more of the return from owning REITs is supposed to come from income (instead of price appreciation) compared to ordinary stocks, it's easy to see where the idea came from. However the yields on US REITs are now, I believe, down to the average yield on US stocks? (from maybe 2x in 2000?).

Studying the graphs of REITs v. bonds here, as so many have posted, should dissuade one from such a view that REITs are bond-like-- REITs have equity levels of volatility. And income levels are no longer massively superior.* But it's hard to shake a notion, once acquired. Especially if there is an underlying truth-- that commercial leases are a more stable source of cash flow than most i.e. that property is a different asset class.

* I am thinking the yield gap went from something like 500 basis points in 2000 (7.0% v. 2.0%) to something like 0 now?

REITs end up decent proxies for commercial real estate holdings in the long run, but in the short run they can have an unfortunate response to stock market events. But if you are holding for longer periods I think they can serve as intended.

But they are not bonds. That has both good and bad aspects, of course.

Nate79 wrote:What I don't understand is why people could even think that REITs could in any way at all be consider part of a bond allocation or bond like.

My guess is that it is because of the way (according to report) that unscrupulous advisors sell individual non-traded REITs to customers.

More generally, there is a pernicious kind of selling proposition that goes something like this:

You say you are risk-averse.

You say you want bonds.

Bonds provide an income stream.

This thing I am promoting provides an income stream.

The salesperson hopes the prospect mark will infer the falsehood "therefore this thing I am promoting is like bonds," without the salesperson needing to say it.

The idea that anything that provides an income stream is like bonds is commonly put forward. In particular it is frequently suggested that direct holdings of residential rental real estate and dividend-paying stocks can be "bond substitutes."

I count REITs as Alternatives, not stock or bonds - my asset allocation is ~25-55-20 fixed income-equities-alternatives, and within the 20 alternatives I have 7.5% bullion, 2.5% commodities and 5% each domestic and international REITs. My investing objectives include 'protecting what I've earned', and I believe in maximal diversification. I've been persuaded that REITs will perform more like 'real estate' than 'equities' over the long-run...no idea if that will be proven correct, but with only a 25% equity allocation - and a lot of tax-favored space - I'm happy with my overall 10% REIT exposure.

Last edited by 209south on Fri May 19, 2017 8:31 am, edited 1 time in total.

One of the issues I have with Personal Capital is their classification of REITs as alternatives. They lump REITs along with commodities as alternatives. It messes up my stock / bond ratio. I don't invest in commodities or a REIT specific fund. Of course REITs are included in index funds.

InvestorNewb wrote:Vanguard's REIT ETF (VNQ) was worth $63.09 on September 19, 2008. On March 6, 2009, it was worth $21.15. That's a decrease of 66.48%.

The only similarity to bonds is that they generate income. They are a completely different product and they are not a safe investment like bonds.

They move in two directions, down, and up. I own them because my written investment plan calls for them.

By the way, all equities were down during that 6 month period, or market crash, so why that time frame, rather than say, 10 years?

The point is they fell more than the market as a whole during that time period.

REITs had a period of (in retrospect) extreme undervaluation in the late 90s (along with all value stocks). Thus, they did incredibly well. With yields much much closer to the market as a whole, it's unlikely that will be repeated.

REITs should be classified as equity because the REIT's balance sheet has outstanding mortgage obligations to which your REIT holder's claim is subordinated (ie, their mortgage is paid before you get your dividend). If you hold REIT mortgage paper that is a bond instrument. Bond holders eat before stock holders...makes classification very simple.

Nate79 wrote:What I don't understand is why people could even think that REITs could in any way at all be consider part of a bond allocation or bond like.

Direct holding of leveraged real estate has risk and returns comparable to a BBB bond. So it acts more bond like than stock like.

One can make the reasonable extrapolation that if the only change in the legal structure was from a private to a public corporation that a REIT should act like a bond. After all none of the underlying economic factors have changed. Alas, this is not true. The liquid nature of publicly traded REITS results in a higher valuation, so it takes on similar risks and returns levels as stocks.

InvestorNewb wrote:Vanguard's REIT ETF (VNQ) was worth $63.09 on September 19, 2008. On March 6, 2009, it was worth $21.15. That's a decrease of 66.48%.

The only similarity to bonds is that they generate income. They are a completely different product and they are not a safe investment like bonds.

They move in two directions, down, and up. I own them because my written investment plan calls for them.

By the way, all equities were down during that 6 month period, or market crash, so why that time frame, rather than say, 10 years?

The point is they fell more than the market as a whole during that time period.

REITs had a period of (in retrospect) extreme undervaluation in the late 90s (along with all value stocks). Thus, they did incredibly well. With yields much much closer to the market as a whole, it's unlikely that will be repeated.

But they could, right? If inflation was to be unexpectedly high at some point in the future, inflation makes REITs worth more. We'll see. Hang on. lol

I also was taught that REITs work like commodities, with less risk of owning a pile of corn in the front yard.

I'm amazed at the wealth of Knowledge others gather, and share over a lifetime of learning. The mind is truly unique. It's nice when we use it!

Surely you are not saying that the green line, the Vanguard REIT Index Fund, VGSIX, has "risk and return comparable" to the blue line, the BBB-average-rating bond fund, PRPIX. So I'm not clear on what you really are saying.

Are you saying that "direct holding of leveraged real estate" is like a BBB bond? But the original poster's question, and most of the follow-up discussion, is about REITs.

Is there anything available to the retail investor that is a good replica of "direct holding of leveraged real estate?"

Nate79 wrote:What I don't understand is why people could even think that REITs could in any way at all be consider part of a bond allocation or bond like.

This may be because some of the leading personal finance authors make that confusion. Or imply it. Thinking Burton Malkiel in particular, or David Swensen (I'd have to reread Swensen to see exactly what he says). Both in the late 90s/ early 2000s suggested 20% weightings in REITs as a source of income ie bond-like (even if they don't use so many words).

So I think it has gotten blurred in the minds of many investors. To be fair, since more of the return from owning REITs is supposed to come from income (instead of price appreciation) compared to ordinary stocks, it's easy to see where the idea came from. However the yields on US REITs are now, I believe, down to the average yield on US stocks? (from maybe 2x in 2000?).

Studying the graphs of REITs v. bonds here, as so many have posted, should dissuade one from such a view that REITs are bond-like-- REITs have equity levels of volatility. And income levels are no longer massively superior.* But it's hard to shake a notion, once acquired. Especially if there is an underlying truth-- that commercial leases are a more stable source of cash flow than most i.e. that property is a different asset class.

* I am thinking the yield gap went from something like 500 basis points in 2000 (7.0% v. 2.0%) to something like 0 now?

Thanks for the Malkiel reference. He may not be perfect in the Boglehead world with his REIT views but I think you would do a lot better with his advice than with a financial advisor charging 1 percent of assets under management and recommending 3 percent load funds with 1 percent expense ratios.

Nate79 wrote:What I don't understand is why people could even think that REITs could in any way at all be consider part of a bond allocation or bond like.

This may be because some of the leading personal finance authors make that confusion. Or imply it. Thinking Burton Malkiel in particular, or David Swensen (I'd have to reread Swensen to see exactly what he says). Both in the late 90s/ early 2000s suggested 20% weightings in REITs as a source of income ie bond-like (even if they don't use so many words).

So I think it has gotten blurred in the minds of many investors. To be fair, since more of the return from owning REITs is supposed to come from income (instead of price appreciation) compared to ordinary stocks, it's easy to see where the idea came from. However the yields on US REITs are now, I believe, down to the average yield on US stocks? (from maybe 2x in 2000?).

Studying the graphs of REITs v. bonds here, as so many have posted, should dissuade one from such a view that REITs are bond-like-- REITs have equity levels of volatility. And income levels are no longer massively superior.* But it's hard to shake a notion, once acquired. Especially if there is an underlying truth-- that commercial leases are a more stable source of cash flow than most i.e. that property is a different asset class.

* I am thinking the yield gap went from something like 500 basis points in 2000 (7.0% v. 2.0%) to something like 0 now?

Thanks for the Malkiel reference. He may not be perfect in the Boglehead world with his REIT views but I think you would do a lot better with his advice than with a financial advisor charging 1 percent of assets under management and recommending 3 percent load funds with 1 percent expense ratios.

Yes, of course.

But one is confronted with "well Malkiel/ Swensen says it"-- as a proof by authority.

When one probes, there's not a clear answer. At least one person says they attended a seminar, and Swensen is *still* saying it, but to be honest, I'd like to see it written down, with due reference to what happened 2007-09 with REITs.

I think part of the problem is in the late 90s you could buy REITs with 7-8% yield, 600 basis points over the US stock market-- they avoided the bear market of 2000-03 pretty much. Now that premium appears to be 0 basis points, essentially. The whole rationale for REITs (as income tilted non-equity investments) is to my mind undercut by that. And we know they can be more volatile than common stocks.

Just my two cents, but I really think it would help to recognize that there is a genus, equities, within which ordinary company stocks and REITs are two different species. Practically it may or may not make any difference depending on your investment strategy, but that taxonomy avoids a lot of pointless semantic debate.

My normal target investment allocation for REITs is the allocation the I get from VTI. In other words no REIT funds.

One interesting thought about REITs is that because of their increased volatility over stocks they might be a good place to put money into when rebalancing after a large market event - say a 25% decline.

When you start selling off stocks after the recover, sell REITs first.

NiceUnparticularMan wrote:Just my two cents, but I really think it would help to recognize that there is a genus, equities, within which ordinary company stocks and REITs are two different species. Practically it may or may not make any difference depending on your investment strategy, but that taxonomy avoids a lot of pointless semantic debate.

Not a semantic debate, but I agree that REITs are a sub species of stocks different from stocks of ordinary business corporations. REITs are required to payout 90% of their income to stock holders as dividends, and so act differently than other stocks.

It's important that the investor not mentally mis-classify REITs as part of a bond allocation. A bond allocation is held for safety, bonds are held primarily for for their lack of volatility. REIT s are very volatile, so are the opposite of bonds in that regard.

"Everything should be as simple as it is, but not simpler." - Albert Einstein |
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On a somewhat-related note, REIT fundamentals are in better shape than they've been since 2000. A big deal is made of leverage being the reasons REITs are more volatile than stocks, but REITs as a general rule aren't actually all that leveraged outside of the obvious exception of the run up to the RE bubble. Rather, the simplest explanation is that there's a lot of undiversified idiosyncratic risk still within the sector. VNQ holds just 157 stocks, with the top 10 holdings accounting for more than a third of assets. Compare that to 510 stocks and 18.61% of assets for the S&P 500. THAT is why REITs are volatile. There's no magic here.

Still, REIT fundamentals are a lot more sound than many seem to be giving them credit for and certainly were another RE crash to happen today, they would fare much better. In that sense, at least, part of a lesson has been learned.